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What Stocks are up against

20 November 2008

The Technical Trader’s view:

This is what the market is up against.

There is an enormous POSSIBLE bear Head and Shoulders Top poised to complete on a break beneath 768.

If that level breaks then the minimum move suggested by the chart is down to 380 or so.

There is very little else to say really, beyond studying the futures charts for the equivalent level and examining their shorter-term charts for evidence of structures that may drive the market through that Pivotal low.

The equivalent level in the futures is 767.50.

As I write we are trading 768.50.

Which is perilously close.

Now look closer.

This is the evidence that supports the bears.

A Triangle looks to have completed, whose measurable move is far beneath the important Pivotal Low that completes the massive Double Top.

The target if the break is sustained? About 630.

Sellers should place Stops above the horizontals from the prior Lows.

The market hasn’t finally closed beneath the Triangle.

But it looks grim, and the consequences of a confirmed breakdown look very grave.

The Macro Trader’s view:

Frustrated equity bears, ourselves included, have had to endure weeks of intraday volatility that has made holding a short position or even a long position, very expensive.

Although equity markets have essentially traded sideways since early October, intraday ranges have been large with a high degree of uncertainty driving volatility. As traders spent time assessing the impact of the global Banking rescue plan on global economic prospects, bear traders became increasingly frustrated.

In part this was due to hopes that the US and others would enact a large fiscal stimulus to kick start the economy back to life, and while this remains a possibility, last weekend’s G20 meeting proved this wasn’t happening anytime soon; at least not on a global scale.

Now, suddenly, US equities have broken the lows made in early October and other leading markets are again testing the downside, what caused the change?

Apart from a never ending stream of negative data from all the leading economies showing the US, UK Euro zone and Japan falling into recession, the Fed and the Bank of England have changed from worrying about the risk of higher inflation, to fearing inflation might fall too far.

While deflation isn’t a serious threat, both Central Banks have mentioned it and noted that they are ready to act to prevent it. The Fed revealed in yesterday’s minutes that they stand ready to aggressively ease further if need be even though Fed funds stands as low as 1.0%.

The reason behind their thinking is a substantial downward revision to 2009 growth, from 2.0-2.8%, down to -0.2 to +1.1%, with risks to both growth and inflation on the downside. Moreover, they also raised substantially their estimate of the unemployment rate during the period to 7.6%.

In the UK, the MPC minutes for November, also released yesterday, showed policy makers were seriously considering a cut of 200bp or more in order to prevent inflation falling too low and in an attempt to support growth.

In the event they chose to ease by a “smaller” 150bp in order to retain the ability to respond in the coming months as the economy weakened further, as a means of supporting confidence.

In short, the message all this conveys is that the global economy remains in a very tight spot. The US could soon have zero interest rates, never before seen, and rates in the UK could fall as low as 1.0% by the 1st quarter of next year.

Elsewhere, conditions are no better and the falling oil price bears testament to just how weak global demand has become.

In this environment it is no wonder then that equity markets have resumed their bear trend and they look set to slide further.

One small glimmer of hope for the FTSE is Gordon Brown’s intention to unilaterally use fiscal policy to help cushion against the recessions worst effects, but this will likely prove futile. The UK economy relies heavily on services, and the City for highly paid jobs. In this environment they are being lost, not only here but abroad too, so the weak global economy will likely swamp the best efforts of the UK government and drag the UK down too, leaving equities in a true bear market.

Mark Sturdy
John Lewis
Seven Days Ahead

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